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Management and disclosure of climate-related risks 2022

5th September 2022

 

Limited Partners of funds Managed by Solomon JFZ (Asia) Holdings Limited    

 

 

Dear Sirs/Madams,

Re: Management of Disclosure of Climate-related Risks by Solomon JFZ (Asia) Holdings Limited (the “Company”)

 

The Company is pleased to provide the first climate-related risks disclosure aligned to the recommendations from the Securities and Futures Commission (the “SFC”) and Task Force on Climate-Related Financial Disclosures (“TCFD”). The Company believes contributing to addressing climate change is important to creating long-term value for our clients.

 

This letter serves our commitment to providing meaningful transparency on our approach to managing climate-related risks and our developing commitment to integrating climate considerations throughout our business and investment processes.

 

In the appendix of this letter, we disclose how the Company considers climate-related risks and opportunities in the assets we manage on behalf of our clients. In line with the SFC and TCFD recommendations, this letter is structured in three sections as below: -

 

a. The Governance section discusses how climate risks and opportunities feature in our governance and management structures;

 

b. The Investment Management/ Strategy section focuses on the key climate-related components of our strategy: the climate-related risks andopportunities identified over the short, medium and long term, ESG integration and research; and

 

c. The Risk Management section explores how we identify and manage climate risks through our continuously evolving ESG and climate research capabilities, and through our risk management and compliance functions.

 

 It is worth noting that the aforementioned approach will be reviewed on a periodic basis. 

 

Should you have any questions on the information provided in this letter, feel free to contact the Sustainable Investment Committee at general@solomonjfz.com. 

 

Yours faithfully,

For and on behalf of

Solomon JFZ (Asia) Holdings Limited

 

Encl.

 

Governance

 

The Company has a governance framework to oversee how exposures to climate-related

risks and opportunities are assessed, managed and controlled. Board of Directors (the“Board”) maintains oversight of climate-related issues for the purpose of setting high level direction. The Board is responsible for:

 

The board, which is ultimately accountable for the long-term stewardship of the group, has delegated oversight of the management of the climate-related risks to the Group Committee which:

 

  • setting the strategy for managing environmental impact with a focus on climate, including setting targets, monitoring and reporting performance;

 

  • providing central oversight of the management of climate impact to ensure that climate change informs strategic planning and decision-making across all group activities;

 

  • overseeing the management practices which ensure these exposures are controlled in line with the group’s risk appetite and environmental strategy;

 

  • promoting internal awareness and understanding of climate-related threats and opportunities;

 

  • reviewing climate-related issues flagged by the Investment Committee and

 

  • considering both the transition and physical risks associated with climate change and their impact on a variety of asset classes, in both the short and long terms.

 

The Company has also established an Environment Committee which is made up of senior management including Lok Ling Ngai, Tam Shing Tak, Leung Wai Kin of the Company. The oversight of the management of the climate-related risks are delegated to the Sustainable Investment Committee to supervise and monitor the integration of climate-related risk considerations into the investment and risk management processes.

 

The major responsibilities of the Sustainable Investment Committee regarding climate-related risks include:

 

  • ·developing internal capacity to assess climate change risks and opportunities in investment processes;

 

  • ·reviewing processes serving to identify, communicate, manage and escalate climate related events and crises when they arise;

 

  • ·reviewing all investment portfolio’s climate-related risk exposures;

 

  • ·regularly updating the Board on material climate-related risk issues;

 

  • ·execution of the climate-related risk management

 

  • ·adopting Task Force on Climate-related Financial Disclosures (TCFD) reporting.

 

 

 

 

Investment Management

 

The Company defines climate-related risk as both physical and transition risks. Our current view is that transition risks and impacts are particularly important in the near term, which physical risks are increasingly important over longer time horizons.

 

Physical risks are the risks associated with extreme events and changing climate and are typically separated into acute risks from natural disasters such as floods, wildfires, hurricanes and typhoons, and chronic risks, which are related to long-term shifts in the climate such as rising sea levels, a rising heat index, prolonged droughts and flooding.

 

Transition risks are business-related risks that follow societal and economic shifts toward a low-carbon and more climate-friendly future, which includes policy risks such as increased emissions regulation and climate-related standards, and legal risks such as lawsuits claiming damages from entities

 

 

The following are the detailed breakdown of the climate-related risks and potential financial impacts we have identified over short and long terms.

 

Climate-Related Risks

Potential Financial Impacts

Transition Risks (Short-term)

 

a. Policy and Legal

 

  • ·ncreased pricing of greenhouse gas emissions
  • ·Enhanced emissions-reporting obligations
  • ·Mandates on and regulation of existing products and services
  • ·Exposure to litigation

 

  • ·Increased operating costs (e.g., higher compliance costs, increased insurance premiums)
  •  
  • ·Write-offs, asset impairment, and early retirement of existing assets due to policy changes
  •  
  • ·Increased costs and/or reduced demand for products and services resulting from fines and judgments

b. Technology

 

  • ·Substitution of existing products and services with lower emissions options
  • ·Unsuccessful investment in new technologies
  • ·Costs to transition to lower emissions technology

 

  • ·Write-offs and early retirement of existing assets
  •  
  • ·Reduced demand for products and services
  •  
  • ·Research and development (R&D) expenditures in new and alternative technologies
  •  
  • ·Capital investments in technology development
  •  
  • ·Costs to adopt/deploy new practices and processes

c. Market

 

  • ·Changing customer behavior
  •  
  • ·Uncertainty in market signals
  •  
  • ·Increased cost of raw materials

 

  • ·Reduced demand for goods and services due to shift in consumer preferences
  •  
  • ·Increased production costs due to changing input prices (e.g., energy, water) and output requirements (e.g., waste treatment)
  •  
  • ·Abrupt and unexpected shifts in energy costs
  •  
  • ·Change in revenue mix and sources, resulting in decreased revenues
  •  
  • ·Re-pricing of assets (e.g., fossil fuel reserves, land valuations, securities valuations)

d. Reputation

 

  • ·Shifts in consumer preferences
  •  
  • ·Stigmatization of sector
  •  
  • ·Increased stakeholder concern or negative stakeholder feedback

 

  • ·Reduced revenue from decreased demand for goods/services
  •  
  • ·Reduced revenue from decreased production capacity (e.g., delayed planning approvals, supply chain interruptions)
  •  
  • ·Reduced revenue from negative impacts on workforce management and planning (e.g., employee attraction and retention)
  •  
  • ·Reduction in capital availability

 

Physical Risks (Long-term)

 

a. Acute

 

  • ·Increased severity of extreme weather events such as cyclones and floods

 

b. Chronic

 

  • ·Changes in precipitation patterns and extreme variability in weather patterns
  •  
  • ·Rising mean temperatures
  •  
  • ·Rising sea levels
  • ·Reduced revenue from decreased production capacity (e.g., transport difficulties, supply chain interruptions)
  •  
  • ·Reduced revenue and higher costs from negative impacts on workforce (e.g., health, safety, absenteeism)
  •  
  • ·Write-offs and early retirement of existing assets (e.g., damage to property and assets in “high-risk” locations)
  •  
  • ·Increased operating costs (e.g., inadequate water supply for hydroelectric plants or to cool nuclear and fossil fuel plants)
  •  
  • ·Increased capital costs (e.g., damage to facilities)
  •  
  • ·Reduced revenues from lower sales/output
  •  
  • ·Increased insurance premiums and potential for reduced availability of insurance on assets in “high-risk” locations

 

Despite the various financial impacts caused by climate-related risks we have identified above, there are some potential opportunities on the organization’s businesses, strategy and financial planning from a low-carbon transition. The following are the opportunities identified over the short- and long-term climate-related risks.

 

a. Policy and legal

  • ·Governments may provide incentives and subsidies to encourage a certain transition path

 

b. Reputation

  • ·Investing in the companies being an early mover on climate issues may improve reputation, resulting in improved financial performance

 

c. Technology transformation

  • ·Investing in companies offering low-carbon/ zero carbon energy are expected to benefit from increased revenues and profits due to the global energy transformation

 

 

d. Markets

  • ·Investing in companies offering low-emissions/ low-carbon products may benefit from increased revenues in response to changing consumer preferences

 

 

In order to incorporate the material climate-related risks into the investment process, the Company has established policies to manage climate-related risks for its investment activities, to include climate-related risks in the investment philosophy and investment strategies, incorporates climate-related data and considerations into our investment research and analysis process, and takes reasonable steps to assess the impact of these risks on the performance of underlying investments.

 

The Sustainable Investment Committee of the Company will make decisions in line with the respective investment philosophies and clients’ objectives. We look to incorporate material climate-related risks, impacts and opportunities throughout the stages of our investment life cycle, taking into account the characteristics of the asset class and investment capability in question, as well as industry and geography among other factors.

 

The Company has also integrated climate change considerations in the research process from an impact and risk perspective.    

 

The research team would also conduct research to determine to which sectors and industries climate change is material and relevant. Based on this analysis, the research team will assess the impact on the potential investment’s business model, which reveals the risks and opportunities to which it is exposed.

 

 

Risk Management

 

The Company identifies and assesses climate-related risks by using qualitative and quantitative ESG research and assessments. Once identified, climate-related risks are managed through our risk governance structure and incorporated into the Company’s risk management processes.

 

To identify climate-related risks in our investments on behalf of clients, the Company will continue to develop portfolio and risk management research methods focused on assessing companies’ climate-risk exposure and resilience. The following are the detailed breakdown of our current approaches:

 

Qualitative approach: 

    

  • ·Identify those sectors (e.g. utility and power, mining, automobile manufacturers, oil and gas, transportation and logistics) which are more likely to be adversely affected by the transition to a low-carbon economy and
  •  
  • ·Meet with the management of investee companies and analyse the positioning of the investee companies’ business models towards risks and opportunities arising from climate challenges.

 

Quantitative approach:  

 

  • ·Use ESG scores (or scores of a similar nature) developed by [Name of third-party providers, such as Bloomberg] to identify investee companies subject to relatively higher climate-related risks.
  •  
  • ·Use externally available “heat maps” of extreme weather events, rising sea levels or water scarcity to assess the dollar value impact or portion of assets located in regions subject to the threat of these climate-related risks.
  •  
  • ·Utilise in-house or third-party data tools to analyse a portfolio’s climate-related risks in the context of:
    •   - weather or climate data
      • e.g. five-year history of daily weather variables such as temperature and precipitation, extreme weather events including cyclones, earthquakes and drought or
    •   - projected climate conditions
      • e.g. the agreed rate of sea level rise in 10, 20 or 30 years’ time) and assess their likely impact on the portfolio.

 

The investment and risk management team are responsible for developing and maintaining effective internal controls to serve as the first line of defence for the risk oversight of clients’ portfolios.

 

After the process of identifying the material climate – related risks and assessing their impact on the underlying investments, they will be managed periodically within portfolios. In order to effectively manage the risks, the Company has the following measures:

 

  • ·To conduct ongoing assessments of climate-related risks which include updating ESG scores periodically and implementing a climate monitoring dashboard with metrics related to physical and transition risks;
  •  
  • ·To evaluate whether the investment portfolio is unintentionally skewed towards the above sectors. Investment team may also consider second-level effects on companies within the value chain of those sectors.
  •  
  • ·To establish appropriate processes for the timely escalation and reporting of significant issues noted during risk monitoring to the board or other appropriate functional units such as the investment management function; and
  •  
  • ·To regularly review the effectiveness of their risk management systems to ensure that any potentially significant deterioration in climate-related risks is followed up promptly.
  •  
  • ·Integrate climate-related data as constraints in the portfolio construction process by setting an upper bound on a chosen carbon measure on an absolute or benchmark-relative basis.

 

Apart from the ongoing monitoring and management of climate – related risks within the portfolios, the Company would also reallocate assets under management by:

 

  • · Applying a set of restrictions to limit ESG risks:
    • - divest holdings in coal and tar sand activities
    • - avoid financing the tobacco industry as well as companies which are not considered ESG compliant or have the worst ESG practices among peers;
  •  
  • · Reducing positions in or excluding companies with behaviours which deviate from the fund manager’s own beliefs and investor preferences.

 

We implement these preferences by applying maximum percentage thresholds on the above restricted industries for at most [percentage of maximum thresholds, such as 30] % of the fund’s portfolio.

 

The following key tools and index are used to facilitate the Company’s investment and risk management process:

 

  • ·Dow Jones Sustainability Index
    • - Ranks top 10% of the largest 2,500 stocks in the S&P Global Broad Market Index based on their long-term ESG criteria and sustainability and environmental practices
    • - Reviews news stories for each major company's involvement with ESG issues (eg. human rights, labour disputes, workplace safety, fraud, etc.)

 

  • · ESG MSCI Rating System
    • - Measures a company/firm’s management of financially relevant ESG risks and opportunities. Inclusive for equity and fixed income securities, loans, mutual funds, ETFs and countries.
    • - Data Collection: via relevant, publicly available data (thousands of sources) to pinpoint each company’s significant risks. Performance-influencing public controversies also considered.
    • - Rating Calculation: assign percentage weights to each ESG risk according to assessment of time horizon and impact
    • - Rating Result: ESG scores across risks and management (across E, S & G) combined relative to industry peers (i.e. companies of same industry/of similar financial interest/objective).
    • free resources/tools, rating systems, and disclosure reports are available for public access. All data is gathered and presented by MSCI.
    • Detailed report contains MSCI ratings (history, distribution), decarbonization targets, etc., which are all useful features before considering investment in these companies.

 

  • · ND-Gain Country Index
    • - A free, open-source public index showing a country’s current vulnerability to climate disruptions, and assessing a country’s readiness to leverage private and public sector investment for adaptive actions
    • - The Company would use the index to invest in the companies located in the countries which are most ready and least vulnerable. The physical risk of the portfolio is minimized by avoiding companies from countries in red, etc.

 

Last Updated:5th September 2022